Protecting Voting Rights

Investor preferred stock generally requires that the company secure the approval of the preferred stockholders to take certain actions. The parties could agree to expand the traditional list of approval items for investor preferred stock to include impact-related actions (e.g. changing the company’s purpose).

Although less common, company founders can demand similar voting rights as part of a special class of founders’ shares. Founders, for example, may hold preferred shares with voting rights that allow them to veto any change of control they view as not aligned with the company’s mission.

If founders hold the voting rights, investors may try to negotiate for a provision that requires founders to buy (or find a buyer for) the investor shares that would have been sold in a vetoed transaction, at the price offered in that transaction. Conceptually, these rights could also apply to a capital raise, with founders reserving some period to find more mission-aligned capital, even after the board has approved a funding round.

The parties will need to agree on the areas that the voting rights will cover, as well whether a simple majority or super-majority of rights holders will be required to block changes.

Sample language (Founder Version): As long as the Founders hold at least [X percent] of the [Series Y] Shares, the vote of at least [X %] of the [Series Y] Shares, voting as a separate class, shall be required for the Company to (1) enter into a Change of Control transaction, or (2) amend or repeal the [purpose/mission] set forth in [Article X of the Company’s charter document] OR [the “best interests” provisions set forth in Article X of the Company’s charter document] OR [the corporate citizenship standards described in Exhibit X].

Sample language (Investors version): As long as the Investors hold at least [X percent] of the Shares purchased, the vote of at least [X percent] of the Shares, voting as a separate class, shall be required for the Company to (1) enter into a Change of Control transaction, or (2) amend or repeal the [purpose/mission] set forth in [Article X of the Company’s charter document], OR [the “best interests” provisions set forth in Article X of the Company’s charter document] OR [the corporate citizenship standards described in Exhibit X].

Sample Language (debt deal): During the term of the Loan, the consent of the Investor shall be required for the Company to (1) enter into a Change of Control transaction, or (2) amend or repeal the [purpose/mission] set forth in [Article X of the Company’s charter document], OR [the “best interests” provisions set forth in Article X of the Company’s charter document] OR [the corporate citizenship standards described in Exhibit X].